Employee Retirement Income Security Act (ERISA)

The Employee Retirement Income Security Act of 1974 protects Americans’ retirement assets by implementing rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets. Under ERISA, plans must provide participants with information about plan features and funding and regularly furnish information free of charge.

ERISA also sets minimum standards for participation, vesting, benefit accrual, and funding. The law defines how long a person may be required to work before becoming eligible to participate in a plan, to accumulate benefits, and to have a non-forfeitable right to those benefits. It also establishes detailed funding rules that require plan sponsors to provide adequate funding for the plan.

ERISA requires accountability of plan fiduciaries and generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan’s management or assets, including anyone who provides investment advice to the plan. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan. In addition, ERISA addresses fiduciary provisions and bans the misuse of assets through these provisions.

In addition to keeping participants informed of their rights, ERISA also grants participants the right to sue for benefits and breaches of fiduciary duty. To ensure that participants do not lose their retirement contributions if a defined plan is terminated, ERISA guarantees payment of certain benefits through a federally chartered corporation known as the Pension Benefit Guaranty Corporation.

Not every retirement plan is subject to the terms of ERISA. In particular, ERISA does not cover retirement plans set up and maintained by government entities and churches. Similarly, if a company sets up a plan outside of the United States for its nonresident alien employees, ERISA does not govern that plan.

The complicated rules of ERISA deter some small-business owners from setting up retirement accounts for their employees. To allow these companies to sidestep the confusing regulations, there are alternatives. For example, a simplified employee pension (SEP) plan is basically an individual retirement account set up by an employer so it can contribute to its employees’ retirement savings efforts. SEPs are often not subject to ERISA regulations.

This set of laws was enacted to address irregularities in the administration of certain large pension plans. In particular, the Teamsters Pension Fund, which had a rather colorful history involving questionable loans to Las Vegas casinos, brought the issue of fiduciary malfeasance related to retirement accounts into the public eye. ERISA was partially created in response to those issues.